Emma Quantrill sums up Financial Markets Authority’s (FMA) position on bank staff incentives, following the authority’s just-released report.
Bank staff incentives are highly sales focused, which increases the risk of inappropriate sales practices taking place, a FMA report shows.
On 15 November, the FMA released its findings of the Bank Incentive Structure review. The report follows hot on the heels of the Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ) 5 November joint review into the conduct and culture of the New Zealand banking industry
The FMA’s latest review looks at the incentive structures that were in place for bank staff, as at 21 May 2018. The investigation focused on nine banks – ANZ, ASB, Bank of New Zealand (BNZ), Heartland Bank, Kiwibank, Southland Building Society (SBS), The Co-operative Bank, TSB Bank and Westpac New Zealand.
Staff incentives schemes linked to sales means banks risk using “inappropriate sales practices”
Additional findings included:
- Internal policies appear to be ineffective at reducing conduct risks.
- Boards and senior management seek and receive little information on the conduct risks associated with incentives.
- While banks are making significant changes to their incentive schemes, these do not go far enough to prevent the risks of inappropriate sales or poor conduct.
Commenting, Liam Mason, FMA Director of Regulation, said:
“The way that banks choose to reward and incentivise their staff is at the heart of the culture that boards are establishing in these firms.
“We expect banks to ensure they achieve consistently good outcomes for their customers. This includes designing and managing incentive schemes in a way that delivers positive outcomes for customers over the life cycle of the products they hold.”
The FMA expects boards and senior management to identify and manage the risks of conflicted conduct and poor sales practices associated with volume-based incentives.
How much are the incentives worth?
Salespeople’s commission (variable pay) for the year ending 31 March 2018 was $71 million across the nine banks, representing 9% of total pay for salespeople, the review shows.
While the average annual variable pay for salespeople is relatively modest, at $6,180, some salespeople earn significantly more. The largest amount of commission earned by a salesperson in the 2016/2017 financial year (FY), across the nine years, was $279,000.
The FMA has outlined a number of incentive scheme features that are designed to decrease the risk of questionable sales practices. The FMA will write to all of the banks included in the review, clearly setting out their expectations. In March 2019, the FMA will ask banks to provide details on how they plan to remove incentives-linked-sales for banks’ sales staff and managers. However, the FMA will chase up any banks who do not provide a response by the cut-off date. The authority will get all banks to explain how they will strengthen their internal policies to address the risks of poor conduct resulting from sales incentives.
Banks will be expected to implement these new incentives structures by no later than 30 September 2019, the start of their next operating year.
To read the full review, click here
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